This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

Running Out of Money

It is a major fear for many Americans. In fact, there is excellent research to support the idea that Americans fear running out of money in retirement more than they fear death. Moreover, while one may argue about their relative fearsomeness, the retirement fears themselves are extremely well-founded.

The wealth-to-income ratio for current workers is a good way to gauge their retirement preparedness, as the Center for Retirement Research (CRR) at Boston College has pointed out. While that ratio maintained remarkable stability across all ages for many years before and leading up to the 2008-09 financial crisis, a report the CRR released in August discloses that these ratios dropped substantially in 2010, signaling even more serious problems ahead for future retirees.

The CRR’s research is based upon the 2010 Survey of Consumer Finances, the Federal Reserve’s comprehensive triennial survey of household wealth in the United States in relation to prior such surveys (which began in 1983). The ratio in 2010, in the wake of the financial crisis and ensuing recession, was “way below” that for all the other survey years (and which wasn’t all that hot to begin with).

The CRR emphasizes that retirees actually need to increase their wealth-to-income ratios well beyond previous levels for four reasons that are well-known to those of us who pay attention to such matters: significantly increased life expectancies; the shift from defined benefit plans, typically pensions, to defined contribution plans, typically 401(k)s; rising health care costs; and much lower real interest rates.

This research again shows what we have known for a long time. National retirement preparedness is not nearly what it needs to be and has been deficient for quite some time. Moreover, the recent financial crisis and ongoing economic difficulties have made a bad situation much worse.

An important new study from the National Bureau of Economic Research authored by James M. Poterba of MIT, Steven F. Venti of Dartmouth and David A. Wise of Harvard further demonstrates that these retirement fears are well-founded, but this time not from the perspective of retirement preparedness, but from the perspective of actual end-of-life experience. The astonishing (and terrifying) finding of the NBER study is that 46% of American seniors die with less than $10,000 in financial assets (including the present value of pension and annuity income).

Think about that for a moment. Nearly half of all Americans die essentially broke and entirely dependent upon Social Security payments and the kindness of others for support. Not only are they unable to withstand financial upheavals such as medical needs which are not covered by entitlement programs, but because Social Security payments are generally relatively low—they were never designed to be one’s sole source of retirement income—these seniors live out their lives every single day in serious financial peril. Not surprisingly, this group was also in disproportionately in poor health during retirement too.

Most financial advisors and most retirement research understandably focus upon saving enough money for retirement and upon how to deal with that money during retirement. This new NBER research takes a unique approach by looking at how things actually play out and turn out.

Unfortunately, the data are clear that things play out and turn out quite poorly far too often and thus mirror the retirement preparedness research quite accurately.

The NBER study was centered on people who were age 70 and older in 1993 and kept looking at these seniors and their financial situations every two years for as long as they remained living (through 2008). It relied upon data collected in the ongoing Health and Retirement Study sponsored by the National Institutes of Health.

Interestingly, the financial outcomes among three different sorts of retiree were often quite disparate. As a whole, married couples are far better off than single people. Only 26% of people in two-person households had annual incomes of under $20,000 and less than $10,000 in other financial assets at death. The number of retirees in that category among single people who had been married in retirement increased to 36% and, among those who had been single throughout retirement, the proportion increased to fully 52%.

The NBER study also provides some other interesting findings. For instance, those who enter retirement with more money live significantly longer. Moreover, retiree home equity declines substantially in the years just prior to death on account of major events such as the death of a spouse or entry into a nursing home facility. The basic findings of most retirement research are confirmed once again.

For obvious reasons, people without significant assets do not get a lot of attention from financial professionals. But it is clear that the message that we all need to save more and probably a lot more for retirement is not getting out and not being heard. Unless and until it does, financial professionals will not have a pool of prospects that is nearly as large as they would like and those they have will not have nearly as much money as either the advisors or the clients would like. To make matters worse, for the reasons described by the CRR research noted above and on account of a shaky economy since 2008 (which period was not covered by the NBER research), we can expect that the number of retirees without significant wealth can only increase, perhaps by a lot.

It is perfectly understandable that we in the investment management and financial planning businesses tend to focus our time and energy on investing retirement savings and on how best to distribute those asserts during retirement. However, it is also in our best interest to work at getting the message out about the “golden rule” of investing: save as much as you can as early as you can. As William J. Bernstein points out in his book The Investor’s Manifesto: “Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble.”

Bernstein notes that while a 25-year-old should save at least 10% of his or her salary, a 45-year-old would need to save nearly half of his or her salary to get the same effect. “Most 45-year-olds will find this nearly impossible,” he writes, “if for no other reason than the necessity of paying living expenses, payroll taxes, and income taxes.”

Working toward the implementation of this golden rule would be a great thing for the economy (more investment) and the future (better retirement prospects). As Michael Burry (profiled by Michael Lewis in The Big Short) pointed out in his recent UCLA commencement address, we tend toward the “gospel of drunk drivers and cheating spouses” by taking on enormous long-term risk for short-term and limited gain. Instead, may we work toward and find effective means of reversing that tendency by emphasizing, reiterating and demonstrating the need for all of us to begin putting first things first.